This article explains when you need to add VAT to expenses.
- VAT overview
- How to add VAT to expenses if you're VAT registered
- How to submit an expense without VAT if you're VAT registered
- How submit expenses if you're not VAT registered?
As a contractor, you have the responsibility of determining whether an expense is vatable.
All expenses must be broken down into ‘net amount’ and ‘VAT’ regardless of your VAT registration status.
We advise you to:
- Request a VAT receipt to see the breakdown
- Check if they have a VAT number
- Ensure the expense is applicable to VAT
If you are unable to obtain a receipt showing a breakdown of VAT, please use the VAT calculator.
It is important to ensure that the VAT is correctly calculated.
- If you are VAT registered and do not break down the VAT amount: e.g. entering the gross amount (which includes VAT) into the ‘net’ box would mean the VAT will be incorrectly calculated, and you will overcharge on the client invoice.
- If you are not VAT registered and do not break down the VAT amount: e.g. omission of VAT amount will mean it will not be charged on the client invoice, and you will be undercharging on the client invoice.
How to add VAT to expenses if you're VAT registered
If you're VAT registered you should ensure VAT is charged on all billable expenses, even if you did not incur VAT yourself.
Example: VAT is added
- Overnight stay at a hotel
- Room cost = £100
- VAT = £20
Example: VAT is zero-rated
- Train tickets (public transport is zero rated)
- Charge your client what you paid AND add 20% VAT.
- I.e. £100.00 (Zero VAT).
Therefore, enter the expense as follows:
Rule of thumb
- VAT must always be charged on your expenses other than disbursements*
- If you didn’t incur VAT on the expense, you charge VAT.
- If you incurred VAT on the expense, you don’t charge it again.
How to submit an expense without VAT if you're VAT registered
If you do not wish to add VAT to an expense, then you can simply leave the VAT field blank when entering the expense.
How submit expenses if you're not VAT registered?
If you are not VAT registered you must ensure that VAT is not charged on your billable expenses, unless VAT was incurred and therefore it should be entered as displayed on original receipt of the expense. For example:
When VAT is already included:
- Overnight accommodation normally includes standard rate VAT.
- Add in the VAT figure as displayed on receipt.
When VAT is zero rated:
- Public transport is zero rated, so you charge your client what you paid only.
You do not add VAT on a payment made on behalf of your customers, the following must apply:
- You paid on your customer’s behalf and acted as the agent of your customer
- Your customer received, used or had the benefit of the goods or services you paid for on their behalf
- It was your customer’s responsibility to pay for the goods or services, not yours
- You had permission from your customer to make the payment
- Your customer knew that the goods or services were from another supplier, not from you
- You pass on the exact amount of each cost to your customer when you invoice them